Is lm curve
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Prof. J.R. Hicks proved that the general equilibrium of an economy, including the interest rate, can be determined using the IS-LM curve analysis which synthesizes the classical IS curve analysis of the real sector and the Keynesian LM curve analysis of the monetary sector. The IS curve shows the relationship between interest rates and output/employment levels that achieve equilibrium in the goods market. The LM curve shows the relationship between interest rates and income levels that achieve equilibrium in the money market from the equality of money demand and supply. The intersection of the IS and LM curves indicates the general equilibrium interest rate and income level where both the goods market and money market are in equilibrium.
![IS-LM CVURVE ANALYSIS
Prof .J.R.Hicks has proved that through a synthesis of the classical
analysis of the real sector[IS] and the Keynesian analysis of the
monetary sector[LM] we can determine the general equilibrium of the
economy as well as the rate of interest for the economy with the use of
IS and LM curves.
The term IS is a short hand expression of the equality of investment and
saving which represents the product market or real sector.
The term LM is the short hand expression of the equality of money DD
& money supply.](https://image.slidesharecdn.com/is-lmcurve10-200615085508/85/Is-lm-curve-1-320.jpg)
Is lm curve
- 1. IS-LM CVURVE ANALYSIS Prof .J.R.Hicks has proved that through a synthesis of the classical analysis of the real sector[IS] and the Keynesian analysis of the monetary sector[LM] we can determine the general equilibrium of the economy as well as the rate of interest for the economy with the use of IS and LM curves. The term IS is a short hand expression of the equality of investment and saving which represents the product market or real sector. The term LM is the short hand expression of the equality of money DD & money supply.
- 2. The IS Curve: it is related with interest induced changes in aggr. DD. According to Keynes , investment in an economy depends on real rate of interest. If the level of employment is too low, it can be remedied by lowering the real rate of interest, which will induce an increase in investment- income-aggre.DD-increase in output and finally an increase in employment. IS curve shows what the real rate of interest should be to achieve any desired level of output and employment.
- 3. Properties of the IS curve. Slope: It is negatively sloped which shows that a higher level of interest rate reduces investment spending and aggre.DD. Shifts in the IS curve: If autonomous spending increases IS curve will shift to the right with reduction in saving. when investment falls or saving increases, the IS will shift to the right and the equilibrium will be established at lower level of income and interest. LM Curve. It shows various combinations of interest and income levels at which there is equality b/n SS. Of money & DD. for money.
- 4. In the money market ,the entire economic activities centre around the DD. for & SS. Of money. The DD. for money consists of transaction DD. & asset DD. The SS. Of money consists of transaction purposes & holding it for asset purposes. Total DD. money is a function of both income and rate of interest, and one of its components, transaction DD. is a function of income and asset demand is a function of the rate of interest. Liquidity preference function and the money supply also establish a relation b/n income and the rate of interest. The rate of interest will be low when the income is low and high when the income is high.
- 5. Properties of LM curve slope :It is positively sloped which means that an increase in the rate of interest reduces the DD. for money. Shifts in the LM curve: A change in money supply shifts the LM curve either to the right or left General Equilibrium- Product and Money Markets The general equilibrium in terms of both IS and LM curves is reached whenever there is a single pair of interest rate and income level both in the product and money market.
- 7. The figure shows an equilibrium position where IS and LM curves intersect each other at point E relating to Y level of income and R rate of interest. If there is any deviation from the equilibrium position, certain forces will act and react upon each other and equilibrium will be restored. Take the point A on the LM curve where the money market is in equilibrium at Y1 income level and R2 interest rate. But the product market can be in equilibrium at Y1 only at a higher rate of interest R1 corresponding to point B on the IS curve.
- 8. At point A, there is excess of investment over saving which indicates excess demand for goods which raises the level of income. If the level of income rises, the need for transactions increases and hence people tend to sell bonds which in turn will raise the interest rate moving the LM equilibrium to point E where a higher interest rate R and a higher income level Y exists. But rising interest rate reduces investment and an increase in income raises in saving. This helps to bring about the equality of I and S at point E where the general equilibrium is re-established by the equality of IS and LM.